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June 23 — In a decision that left neither party completely victorious, the U.S. Supreme Court declined June 23 to overrule the 25-year-old presumption of reliance afforded class securities fraud plaintiffs by the fraud-on-the-market theory.

However, it concluded, defendants may seek to rebut the presumption at the class certification stage.

Set out in Basic Inc. v. Levinson, 485 U.S. 224 (1988), the theory creates a rebuttable presumption of reliance for investors who bought or sold securities in an efficient market; investors are presumed to have relied on the market price, which will reflect the alleged misrepresentation or omission.

Without the presumption, each individual investor could have to show that he or she relied on the alleged misrepresentation, essentially precluding class certification.

However, he added, because Halliburton did not have the opportunity to rebut the presumption prior to class certification, the lower court's decision granting certification must be vacated and the case remanded for further proceedings.

Middle Ground

“The ruling reflects a form of the `middle ground' anticipated by many observers,” said Howard Privette, Paul Hastings LLP, Los Angeles. “While not the complete victory the defense bar was hoping for, it provides defendants more ammunition to defeat these cases earlier in the proceedings.”

In Richman's view, “[t]he upshot is that defendants will now likely pull out all stops to litigate price impact at the class-certification stage. Advancing the fight on this issue from the merits stage to an earlier phase of the litigation could help dispose of meritless claims that might otherwise have squeaked through the class-certification stage under Basic's presumptions. But the new rule could also turn class certification into an epic battle, rather than a more subdued skirmish.”

“Perhaps the main lesson from the Halliburton case is that it is a good time to be an economics expert,” Richman concluded. “Demand for those services should increase.”

The ruling has been highly anticipated by the securities bar. In the words of New York lawyer John Dellaportas, Morgan Lewis & Bockius LLP, a successful fraud-on-the-market challenge “would be like a nuclear bomb dropping in the securities world.”

Consistency of Presumption

In the decision, Roberts recapped that more than 25 years ago, the high court concluded that plaintiffs could satisfy the reliance element of a claim under 1934 Securities Exchange Act Rule 10b-5 “by invoking a presumption that a public, material misrepresentation will distort the price of stock traded in an efficient market, and that anyone who purchases the stock at the market price may be considered to have done so in reliance on the misrepresentation.”

“We adhere to that decision and decline to modify the prerequisites for invoking the presumption of reliance,” the high court continued. However, to “maintain the consistency of the presumption with the class certification requirements of” Fed. R. Civ. Proc. Rule 23, defendants must have a chance before a class is certified “to defeat the presumption through evidence that an alleged misrepresentation did not actually affect the market price of the stock.”

“Because the courts below denied Halliburton that opportunity, we vacate the judgment of the Court of Appeals for the Fifth Circuit and remand the case for further proceedings consistent with this opinion,” the Court concluded.

Ginsburg also filed a brief concurring opinion in which Breyer and Sotomayor joined. She pointed out that it “is incumbent upon the defendant to show the absence of price impact.” As such, the decision “should impose no heavy toll on securities-fraud plaintiffs with tenable claims.”

Justice Clarence Thomas filed an opinion concurring in the judgment in which Justices Antonin Scalia and Samuel Alito joined.

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